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Demonetization not enough to clean up real estate, says Assocham

realestateThe ongoing crack down on black money alone will not be helpful to remove black money from the real estate sector, industry union ASSOCHAM said.

Many buyers of real estate prefer to show lower costs on record simply to avoid the high levels of stamp duties payable on such transactions. In most states, Indians have to pay 7-8% of the purchase price of the property as stamp duty.

Assocham said state government must “drastically slash” the stamp duty on purchase of residential and commercial properties to eliminate the use of unaccounted cash in the transactions and “save the real estate and construction industry from being stamped as the parking lot for the dubious deals.”

The biggest beneficiary would be the buyers of the residential or commercial property.

“One of the biggest reasons for the cash forming 30-40 per cent of the real estate transactions is the high level of stamp duty. With 6-7 per cent stamp duty , purchaser of a flat worth Rs 1-1.50 crore will have to shell out different government levies and other charges like registration, lawyers’ fee to the extent of Rs 10 lakh or so. For a middle class family, which depends largely on borrowed money, this is a huge amount.

Likewise, the registration value also determines the capital gains tax for the sellers. With both these levies accounting for significant account, there is a big incentives for the buyers and sellers to show the registration amount as much lower than the real transaction value,” the chamber said.

It said there are instances where ironically, people filing their income tax returns and living a clean life are forced to withdraw from their legitimate bank accounts cash for such transactions.

“Thus, the system forces you to convert white into black and not black into white. Nobody likes it, but the state governments must come forward and slash it by at least 50 per cent and the move would rather result in increase in their revenue rather than reducing it,” ASSOCHAM Secretary General Mr D S Rawat said.

Lower stamp duty would also revive the demand in the highly suppressed sector which would further be jolted with cash totally drying out from the transactions, the chamber said.

“The cleanup will take place with lower duties, ease of doing business in terms of clear land titles by the state regulatory agencies and other clearances being made transparent. It cannot be one –way street where the builders are expected to grease the palm of the corrupt officials and others while they are then expected to do every other transactions by cheques. Hopefully with the new model law in place, things should improve,” the chamber said.

A recent joint paper by the ASSOCHAM and Thought Arbitrage did find prevalence of rampant black money or ‘untaxed money’ in the real estate business posing a great challenge for the construction industry.

For speedy approvals and sanctions from authorities, builders or contractors are often compelled to pay large sums of money as bribe to government officials, surveyors, engineers etc. A part of the burden is passed on to the ultimate buyer who in turn has to pay in cash to the contractor.

“Let us use this strong government move against black money and corruption as an opportunity to the clean up different sectors of the economy, which have been suffering on account of this menace,” the chamber said.

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